China's unexpected decision to devalue the yuan may negatively impact Indian exports. The 1.9% devaluation of the yuan makes Chinese exports cheaper and further erodes the competitiveness of Indian exports. It could increase pressure on margins for Indian exporters and hurt exports not just to China but also to third countries, exacerbating India's nearly $50 billion trade deficit with China. While a one-time move may not have major effects, ongoing yuan devaluation would gradually undermine India's competitiveness if not addressed. Indian policymakers will need to carefully respond to prevent overreaction but also maintain parity with Asian peers on currency valuation. Vulnerable sectors like steel exports may face greater impact if Chinese exporters lower prices to boost sales

1. China's Yuan Devaluation May
Hit Indian Exports
POSING THREAT Yuan's daily-fixing rate cut
by record 1.9%; exporters fear move may
dent competitiveness of Indian exports;
trade deficit with China close to $50 billion

3. Contd..
• China's unexpected decision to devalue the yuan in a bid to
boost sluggish overseas sales has come at a particularly bad
time for India, experts said.It's also raised the possibility of
a currency war as countries battle for a share of the slow-
growing global export market. India's exports have
contracted for the past eight months amid an erosion of
competitiveness, impacting domestic recovery and also
potentially threatening the Narendra Modi government's
Make in India programme. This aims to turn India into an
export-led manufacturing centre to create jobs, lift incomes
and hasten growth.
• On Tuesday , China's central bank cut the yuan's daily-fixing
rate by a record 1.9%, leaving Indian exporters a worried
lot.

4. Contd..
• “This is not good news for Indian exports. This will further
dent the competitiveness of Indian exports,“ said Ajay
Sahai, director general and CEO of the Federation of Indian
Export Organisations lobby group, echoing frustrations over
the “oneoff depreciation“ by the Chinese central bank that
has taken the yuan to a three-year low.
• “It will not just hurt Indian exports to China but largely to
third countries. India already has a trade deficit of close to
$50 billion with China,“ Sahai said. Finance secretary Rajiv
Mehrishi said the move seems to suggest that China is
moving toward a flexible exchange rate.
• “In my opinion, it should have some impact on our exports.
Exports from China would be cheaper,“ he said, adding that
it was difficult to quantify the impact.

5. Contd..
• Companies see the move squeezing margins. “It could increase
margin pressure on India's exports where we compete with China,“
said Anil Bhardwaj, secretary general, Federation of Indian Small
and Medium Enterprises. The Chinese central bank devalued the
yaun after data showed growing trouble for the world's second
biggest economy that has been hit hard by the near 15% trade-
weighted appreciation over the past one year.
• China's exports fell 8.3% in July suggesting further weakness in the
economy that's likely to grow at a 25year low of below 7% this year.
Attempts to revive the Chinese econo my through devaluation
spells trouble for everybody else.
• India is battling a loss of competitiveness because of the relative
appreciation of its currency against those of its competitors.

6. Contd..
• “Today's move also has significant implications for the rest of the
region. To a large extent, the CNY (yuan) operates as a regional
anchor, limiting the ability of the other regional currencies to fall
against the US dollar,“ said Richard Illey , chief economist, emerging
markets, BNP Paribas. Sonal Varma, executive director and India
economist at Nomura, said the impact will depend on future action.
• “If it's a one-off move then besides some short-term impact it
would not have much effect. One day's move would not change the
dynamics,“ she said. “If it's the start of a trend then at the margin it
would start eroding India's competitiveness.“
• HDFC Bank's chief economist Abheek Barua expects some sort of
cur rency sparring. “We would need to ensure that we don't
overreact but keep on intervening and not be seen out of whack
with Asian peers,“ he said, but added that the move may not be
overtly negative for the current account.

7. Contd..
• “We supply a lot of raw material to China... If its domestic
situation gains, then it could benefit us,“ he said. Aggressive
intervention is an option but panic reaction should be
avoided, he said. Some sectors may be especially
vulnerable. The devaluation will benefit steel exporters, for
instance, but if they choose to retain the additional margin,
this would not have any significant incremental impact on
international prices, said Jayanta Roy, senior vice president,
ICRA.“However, if they drop their export price in order to
push volumes, this would lead to a further softening of
international steel prices, impacting the competitiveness of
Indian steel manufacturers,“ he said.

8. Parveen Kumar Chadha… THINK TANK
(Founder and C.E.O of Saxbee Consultants & Other-Mother
marketingandcommunicationconsultants.com)
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